Why Startup Short Cuts Can Be Dangerous
Building a business from scratch takes a long time and a lot of work, so it's natural for first-time entrepreneurs to look for shortcuts. I'm referring to opportunities that allow you to reach your goal faster than you could if you kept on building your company step by laborious step. When most people discover a shortcut, their first response is to view it as a fantastic stroke of luck. In fact, you need to be extra cautious with it.
One of the young entrepreneurs I've been helping faced such a decision recently. Marisa Wu is the founder of Salty Road, a Brooklyn, New York-based company that makes artisanal saltwater taffy. When she first came to see me, the business was doing well. She had so many orders that she'd begun outsourcing her production. She was having problems with her suppliers, however, and wanted to go back to making her taffy in Brooklyn. Her dream was to open a storefront operation with taffy-making equipment that the public could watch in action. The problem was, she didn't have enough money to either buy the equipment or lease a storefront.
I've written on Inc.com about how she used crowdfunding to raise capital to purchase the equipment. Renting a storefront in Brooklyn posed an even bigger challenge. She'd need to lease about 1,000 square feet of retail space, which would cost her $4,000 to $8,000 per month. That's a lot of taffy. A box of Salty Road retails for about $6.50. She charges her retailers $3.25 per box, and she herself has a gross margin of 61.5 percent, which translates into gross profit of $2 per box. She'd need to sell 2,000 to 4,000 boxes per month just to cover the rent.
Marisa realized that, to stay in Brooklyn, she'd have to postpone the storefront part of her dream. Instead, she found cheaper manufacturing space--not at street level--and was negotiating a lease when she received a telephone call from the owner of a building in the Williamsburg neighborhood of Brooklyn. He said he was planning to make and sell chocolate on the ground floor of the building and would like to do taffy as well. Would Marisa be interested in partnering with him?
She was excited when she called with the news. I asked if she had a meeting set up. She said yes. I said, "Good, but don't make any commitments."
She called back after the meeting. "It's a beautiful building," she said. "He wants half my business, but it would be everything I want it to be." I asked her to tell me about him. "He's a little tough and seems to be highly focused on his own agenda," she said and proceeded to list, without realizing it, all the reasons the partnership would end badly. "I really should consider it," she concluded. "It's ideal. It's perfect for me."
"So you have a choice," I said. "It sounds like you already know you're not a fit with this guy, but you also think this deal is a shortcut to your dream. What's more important--your long-term happiness or achieving your dream right away? Understand, he'll be in control, because it's a 50-50 deal and he owns the building."
When she thought about it that way, Marisa realized her dream could become a nightmare. She decided to stick with manufacturing in the space she'd found. She sells her taffy from her website as well as in high-end food stores. She'll have to wait a few years on the storefront, but she'll be much happier than she would have been if she'd taken the shortcut.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.